Business Management and Consumer Studies: An International Journal

Vol.1, No.1 (2023), P.No. 30-33

An examination of capital structure, financial performance, and

firm value-Evidence from Indonesia
Suman Anselaha, Moeljadib, Made Sudarmab, Sumiatib
a
Doctoral Student in Faculty of Economic and Business, University of Brawijaya, Indonesia
b
Faculty of Economic and Business, University of Brawijaya, Indonesia
a
sumananselah@gmail.com
ABSTRACT
The purpose of this study was to ABSTRACT
examine and analyze the influence of the determinants of capital
structure and financial performance of the company's value, as well as financial performance
through the capital structure to the company's value. This study used a sample of saturated
(census) that all manufacturing companies listed in Indonesia Stock Exchange. The data used is the
data panel with cross section data and time series data, the period of data is 2008 year until 2012
year, so the data panel obtained by analysis unit is n = 110, while the analysis technique using
Path Analyze. The results of this research such as company size variables, debt tax shields
variables, interest rates variables, and exchange rates variables have a significant effect on the
capital structure. Forming factors may increase the capital structure of the company's capital
structure which increased by the company's value. While sales growth is not significant to the
capital structure, indicating that the anomaly of the situation and condition in a public company in
Indonesia is available for the funding policy of the debt is not based on sales growth, but only
based on the size of the company. Dividend payout is not significant effect on the capital structure,
which indicates that the anomaly of the situation and the condition in a public companies in
Indonesia prefer to internal funding sources with retained earnings to finance investment. Capital
structure is significant influence to financial performance and the value of the company. Capital
structure can improve the value of the company that was triggered by the role of financial
performance. Capital structure also significant negative effect on the value of the company, where
public companies in Indonesia is experiencing financial difficulties due to the large debt burden.

Keywords: Capital structure, firm performance, firm value

JEL Classification: E22, L25, G32

1. Introduction
Company in carrying out operations from financial manager has three main
responsibilities in decision-making about financing, investment, and dividend policy. In
terms of financing, the problems faced by financial managers are making capital structure
decisions, such as how to use a combination of debt and equity financing with the
company's assets. Every company seeks to maximize the value of its shares that will
establish targeted by capital structure and raise new capital without disturbing the balance
of the structure (Weston and Brigham, 1994).
Theoretically, financing companies are confronted by a variety of considerations. One
of the theories underlying the funding decision is pecking order theory, suggests that the
tendency of companies to determine the funding source selection on the basis of a
hierarchy of risk (Myers, 1984). Pecking order theory is based on the theory of
information asymmetry. Good financial performance reflects to the professional managers
of the company. One main task of managers in the funding decision is to determine the
company's capital structure. Companies can use lease financing business, warrants, bond.
However, some choice of the combination performed by the company, aiming to
maximize the value of the market, Keshtkar et al. (2012). According to the theory of
capital structure trade-off theory by Myers (2001), stated that the company would borrow
at a certain level, where the tax savings on additional debt to increase in the present value
of the likely cost of financial difficulties. Agency theory Jensen and Meckling (1976),
said that outlines for the influence of the agency as a contract in which one or more

ISSN 2415-0347 (Online), ISSN 2414-2808 (Print)

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 Business Management and Consumer Studies: An International Journal
Vol. 1, No. 2, (2016)

persons (the principal) involve another person (agent) to perform services or delegate
some decision-making authority to the agents. Signaling theory Ross, Stephen A, (1977),
states that the use of debt is a signal delivered by the manager to the market.
Raghvir and Rao (2009), according to their research said that there are significant
negative outcomes among growth companies with capital structure. The findings of the
study, opportunities from the company can find debt too expensive and difficult to finance
future projects, so that the results showed a negative effect on the capital structure, which
is done on the Textile sector. Mansor research et al. (2011), showed a negative result was
not significant between the company and the debt ratio. Another result, the influence of
the company size on the capital structure, carried out by Najjar and Petrov (2011), showed
a significant effect results between firm size and capital structure. Faiza et al. (2013),
shows that there are significant influence between firm size and capital structure. This
study was performed on companies listed in the Indonesia Stock Exchange (BEI), which
is a company that processes raw materials into finished goods consisting for a group of
basic and chemical industry, a variety of industrial and consumer goods industries are
experiencing structural problems, and organizational issues. The first in a structural
problem, such as (1) the export base and a narrow market, (2) Dependence on imports is
very high, (3) absence of medium-tech industry, (4) regional concentration. The second
problem in terms of organization, such as (1) The issue of organizational, legal, and good
corporate governance, (2) Cost and funding, (3) Problems ability to master cross-
functional area, (4) Issue of spare parts and entrepreneurship, (5) leadership problems, (6)
the problem change Management, (7) Lack of human resources (HR) (source SOE
Ministry, 2012).
Based on the phenomenon and the study of the theory and previous empirical research,
the motivation of this study will expand the research that has been done in previous
studies. Some research gap is necessary to test re-influence between the variables, for
example internal and external variable as determinants of capital structure has been
examined separately by Najjar and Petrov (2011), Angelo and Susanto (2012), Chadegani
et al , (2011), Songshin and Adrian (2009). Capital structure influence on the financial
performance has been investigated by Nirajini (2013), Valdir et al. (2012), and the effect
of the financial performance in the companies researched by Mamoun value and Dalia
(2011), Sudiyatno et al. (2012) Erik et al. (2013), Hasani et al. (2012), Habibollah and Nik
(2013).

2. Research methodology
This study examines and analyzes the effect of capital structure determinant variables
on financial performance, capital structure to the company's value, and the financial
performance of the company's value in companies listed on the Indonesia Stock
Exchange. This research was conducted at the manufacturing companies in the Indonesia
Stock Exchange (IDX) with a period of study was 3 months with details of time, such as,
in the first month and the second month, the researchers collected data in the form of
financial statements of companies listed on the Indonesia Stock Exchange, which is
sourced from the Indonesian capital market directory (ICMD) and IDX, and the third
month perform data processing. The population in this study are manufacturing
companies that go public are contained in the Indonesia Stock Exchange (IDX) until 2012
year. All the manufacturing companies listed on the stock exchange divided into 18
industries or subsectors (ICMD, 2013 year), galleries investment UB (2013 year). The
data obtained by the number of firms in the manufacturing industry as a population of 134
companies. The analytical tool used in this study is the path analysis.

3. Analysis and Results

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 Business Management and Consumer Studies: An International Journal

One important assumption in the path analysis is a linear relationship between the
variables in the structural model, usually called the assumption of linearity. Assuming
linearity testing was conducted using Fit curve, calculated by SPSS.

Fig.1. Path analyze results

Based on Figure 5.2 can be described model of the results, which are grouped into two
parts: (1) the effect of firm size, debt tax shields, interest rates, and exchange rate on
capital structure, This indicates that four variables can affect to the capital structure, (2)
the influence of structure capital against the value of the company involving financial
performance variables, the results show that the mediating role of financial performance
can increase the value of companies, that it will have an impact on the increase in value of
company stock. In accordance with the results of this research, the factors forming the
capital structure, able to increase the value of capital structure owned by the company, the
company's value will be lower, it indicates that use of debt to the company is already too
big, and the company's capital structure and financial performance is good, then the
company's value will be higher, this suggests that a company's success can be seen from
the company's financial performance. In the model results found that financial
performance has a significant role to mediate the effect of capital structure on firm value.
Cloud et al. (2011) argues that the larger a company is expected to further profitability
have higher internal funding. Therefore, the profitability has a negative relationship with
leverage (Chen and Strange, 2006). Model pecking order theory suggests that companies
that have large investments tend to high leverage, where the company is great investment
opportunities using external funds in the form of debt when internal funds are insufficient.
Unlike the Pecking Order Theory (POT), the trade off theory reveals that the positive
effect on the profitability leverage. Sayigan studies, et al. (2006) suggest that the
interaction between investment and leverage resulting positive effect on the profitability
leverage.
The results provide a real contribution to the manufacturing industry, especially related
to financial performance such as elements of financial statements and financial ratios.
Good financial management and professionals will improve the financial performance and
corporate value to be high quality. The success of financial management will be an added
value for the company to exist and compete in the advanced by manufacturing industry.
Results of this study contribute to the FSA as regulator regulatory bodies to protect public
investors. For Indonesia Stock Exchange (BEI) to obtain alternative sources of public
funding required by stock exchange of socialization to the community, so that people
understand in addition to saving money and deposits no other alternative investments
through the stock exchange, thus the company does not rely anymore funding from bank
loans.
4. Conclusions
From the above results, it can be concluded that size of the company and debt tax
shields has an influence on the company's capital structure. The results showed that the
sources of funding for manufacturing companies in Indonesia, is still dominated by

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 Business Management and Consumer Studies: An International Journal
Vol. 1, No. 2, (2016)

external funding sources. It can be seen from the firm value as a factor in determining the
policy of the debt proportion, in addition to increase in debt tax shield shows the company
make use of debt. Sales growth and dividend payout variable has no effect on the capital
structure. This shows that manufacturing firms in Indonesia is experiencing a decline in
sales because decrease in profit from the sale and decrease in free cash flow.
Macroeconomic variable such as interest rate and exchange rate have an effect on the
capital structure for manufacturing company. This suggests that macroeconomic variables
can be used by a company or manager to decide the funding policy for debt, due to debt in
the capital structure will enhance shareholder value. Capital structure has an influence on
firm value. This shows that debt in the capital structure of the company will increase the
firm value and capital structure affect to firm value are supported by the role of financial
performance.

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